Halcón Resources Corporation — Q1 2013 Form 10-Q
Filing identity: The supplied filing is for Halcón Resources Corporation, not Battalion Oil Corp. It reports the unaudited three months ended March 31, 2013, with comparison to Q1 2012.
Business context and reporting period
Halcón describes itself as an independent U.S. onshore oil and natural gas company focused on liquids-rich assets. Results reflect a much larger business following the 2012 GeoResources, East Texas and Williston Basin acquisitions. Average production was 26,022 Boe per day, up 542% from 4,055 Boe per day; the acquisitions contributed approximately 21,200 Boe per day of the increase.
Financial and operating metrics
- Revenue: $190.7 million, versus $26.9 million in Q1 2012. Oil sales were $180.8 million; natural gas and NGL sales were $5.5 million and $3.8 million.
- Profit: Operating income was $32.0 million, compared with an operating loss of $9.8 million. Net income available to common stockholders was $5.5 million, or $0.02 basic and $0.01 diluted per share, versus a $34.4 million loss, or $0.50 loss per share, in the prior-year quarter.
- Margins and unit costs: Operating income was approximately 16.8% of revenue. Realized revenue per Boe increased to $81.18 from $72.72. Lease operating expense declined to $10.86 per Boe from $20.33, while depletion rose to $34.11 per Boe from $14.53.
- Cash flow and spending: Operating cash flow was $55.3 million, versus cash used of $9.2 million. Investing cash outflow was $454.6 million, including $389.5 million of oil and gas capital expenditures and $36.5 million for other operating property and equipment. Financing provided $397.6 million. Cash declined $1.7 million to $0.8 million.
- Liquidity: Current assets were $342.1 million and current liabilities $738.2 million, a $396.2 million working-capital deficit. Accounts receivable were $323.7 million. The revolving credit facility had $133.0 million drawn, $1.3 million of letters of credit and $715.7 million of available capacity against an $850 million borrowing base. The company reported compliance with its credit covenants.
- Debt: Long-term debt was $2.501 billion, up from $2.034 billion at year-end; $6.9 million of promissory notes was classified as current. Debt included 8.875% senior notes due 2021, 9.75% notes due 2020, an 8.0% convertible note due 2017 and revolving borrowings. The filing states approximately 95% of debt bore fixed rates, with a weighted-average fixed rate of 9.0%.
Material changes versus Q1 2012
- Revenue and production increased sharply, primarily because the 2012 acquisitions expanded the company’s producing asset base. Pro forma Q1 2012 revenue including the acquisitions would have been $126.6 million, with a pro forma net loss of $18.7 million; these figures are illustrative, not actual reported results.
- Operating costs increased in total with the larger asset base, but lease operating expense per Boe decreased. G&A increased to $29.3 million from $16.2 million, reflecting payroll, office costs and professional fees associated with the expanded business.
- Depletion, depreciation and accretion increased to $81.9 million from $6.0 million, largely due to acquisitions, higher production and a higher depletion rate.
- The company recorded an $18.4 million net derivative loss, versus a $4.9 million loss. Interest expense and other, net, declined to $4.9 million from $13.0 million; the company capitalized $52.8 million of interest, versus $0.1 million.
- In January 2013, Halcón issued an additional $600 million of 8.875% notes at 105% of par. Proceeds repaid revolving borrowings and supported general purposes, including capital spending. The Williston acquisition preferred stock converted into 108.8 million common shares in January, increasing common shares outstanding.
Outlook, risks and unusual items
- Management said near-term capital spending was expected to be funded by operating cash flow, potential non-core asset sales, capital-market transactions and revolver borrowings. It described continuing drilling, acreage expansion and infrastructure investment, but provided no specific production or capital-spending guidance in the supplied filing text.
- Management cautioned that sustained lower oil and gas prices could impair funding for capital expenditures, acquisitions, debt reduction and other obligations. Other identified risks include acquisition integration, reserve replacement and performance, access to gathering and takeaway capacity, commodity volatility, drilling costs, and availability of capital.
- Halcón generally sought to hedge approximately 70%–80% of current and anticipated production for the next 18–24 months. Derivatives were not designated for hedge accounting, so fair-value changes affected reported earnings. At quarter-end, derivative assets were $3.7 million and liabilities were $24.8 million.
- Capital commitments included $68 million of remaining drilling-rig commitments; early termination would incur approximately $42 million in penalties. Aggregate office and equipment lease agreements were approximately $68.8 million through 2024.
- The company asserted $12.9 million of title and environmental defects relating to acquired Brazos County properties. Management and counsel said pending legal proceedings were not expected to have a material effect. The filing reported no material changes to previously disclosed risk factors and effective disclosure controls.
- After quarter-end, the lenders reaffirmed the $850 million borrowing base and amended the credit agreement to provide additional covenant flexibility. The filing also notes exchange offers for senior notes commenced after quarter-end.
Most important facts for investors to verify
- Confirm the issuer and security being reviewed: this filing names Halcón Resources Corporation, not Battalion Oil Corp.
- Review liquidity and refinancing needs in light of the $396.2 million working-capital deficit, $0.8 million cash balance and substantial capital spending.
- Assess whether acquisition-driven production growth can translate into durable operating cash flow after capital expenditures, interest and debt service.
- Examine debt covenants, borrowing-base redeterminations, high fixed-rate borrowing costs and the company’s dependence on continued capital-market access.
- Evaluate hedge coverage and the potential effects of commodity-price movements on realized prices, derivative settlements and reported earnings.
- Track the resolution of the $12.9 million asserted property defects, acquisition accounting adjustments and the company’s future full-cost ceiling tests.